Friday, January 16, 2009

We're back with the third installment of our ongoing Recommended Reading List Series: Investing & Trading Books. Here are the new additions to the list, in no particular order:

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder: Schroeder was hand picked by Buffett to be his biographer and this is the result. Snowball turns you upside-down and inside-out within the world of all things Buffett. I recently read this and enjoyed it immensely.

The Alchemy of Finance by George Soros: In this book, Soros details his decision making process behind investing in the financial markets. Paul Tudor Jones says this book is, "a timeless instructional guide of the marketplace."

How To Make Money in Stocks by William J. O'Neil: Although the title may strike you as slightly 'salesman'-ish, this book actually takes you through the well known CANSLIM method of trading; identifying winning stocks and timing entry and exits. It is the essential combination of fundamentals and technicals.

See also our post referencing energy analyst Gregor Macdonald's cheap oil thoughts. Hat tip to the always on the ball Todd Sullivan at Value Plays for posting up this great slideshow. (Email readers you may need to come to the blog to view the slide deck).

One of the funds we had planned on covering in our hedge fund portfolio tracking series has unfortunately shut down. Okumus Capital, the $990 million group of hedge funds founded by Ahmet Okumus in 1997 has confirmed it is shutting down its funds, as reported by FinAlternatives. Okumus' Opportunity fund had seen 35% gains net per year since inception, but came upon rough waters this year, being down 42.8% as of October. Ahmet was the largest investors in the funds, as he was over 20% of firm assets. His deep value, security analysis stock picking style had gained him much notoriety due to his solid performance and he was featured in Jack Schwager's book Market Wizards.

Thursday, January 15, 2009

Peter Schiff is out with a piece discussing treasuries, entitled 'The Fed's Bubble Trouble.' Here are some of his thoughts:

"If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.

The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.

This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.

However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed?s bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board."

This is the 3rd Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F filings here.

Next up is Galleon Group. Galleon was founded by Raj Rajaratnam in 1997 and currently manages in excess of $7 billion. Raj previously worked for Needham & Company, and when he left was responsible for a compounded rate of return of 37% over 4 years while overseeing $250 million. Raj received a Bsc in Engineering and then an MBA in Finance from the University of Pennsylvania.

Taken from their website, the Galleon Group “manages a series of funds that specialize in the technology and healthcare industries. Currently The Galleon Group manages five different long/short equity funds: Technology, Healthcare, New Media (Internet), Communications and Life Sciences. Galleon’s philosophy and approach differs from that of other hedge funds in the fundamental belief that it is possible to deliver superior returns to our investors without employing leverage. Combine strong fundamental investment analysis with superior trading capability Galleon places a strong emphasis on both fundamental investment analysis and trading. This enables us to identify companies with superior long-term growth prospects while maintaining the flexibility to profit from short-term market fluctuations.”

The following were their long equity, note, and options holdings as of September 30th, 2008 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Some New Positions(Brand new positions that they initiated in the last quarter):A ton of different batches of S&P 500 index (SPY) PutsA few different sets of Nasdaq index (QQQQ) PutsSome sets of Russell 2000 index (IWM) PutsOil Service Sector (OIH) PutsSome S&P 500 (SPY) CallsNokia (NOK) CallsAmag Pharma (AMAG)Marathon Oil (MRO)Pfizer (PFE)Baidu (BIDU)

Some Increased Positions (A few positions they already owned but added shares to)Mastercard (MA): Increased position by 4,366%Analog Devices (ADI): Increased position by1,961%Advanced Micro Devices (AMD): Increased position by 1,716%Halliburton (HAL): Increased position by 983%EMC (EMC): Increased position by 692%Select Sector Financials (XLF): Increased position by 496%SPDR S&P500 (SPY): Increased position by 311%Applied Materials (AMAT): Increased position by 281%SPDR Gold Trust (GLD): Increased position by 175%Apple (AAPL): Increased position by 62%Synaptics (SYNA): Increased position by 55%Microsoft (MSFT): Increased position by 18%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)Google (GOOG): Reduced position by 89%Intel (INTC): Reduced position by 40%Hewlett Packard (HPQ): Reduced position by 36%First Solar (FSLR): Reduced position by 34%Nokia (NOK): Reduced position by 34%Electronic Arts (ERTS): Reduced position by 33%Qualcomm (QCOM): Reduced position by 28%Research in Motion (RIMM): Reduced position by 22%

Assets from the collective long US equity, options, and note holdings were $8.3 billion last quarter and were $7.1 billion this quarter. As you can see, Galleon Group holds various sets of puts on the indexes, taking a pretty bearish stance on the markets, having replaced their old batches of options with new ones. We have not detailed the changes to every single position in this update, but we have covered all the major moves. Also, keep in mind that these filings only include long equity, notes, and options holdings. They do not reflect their cash, short portions, or holdings in other markets (currency, commodities, debt, foreign markets, private equity, etc). This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. The other funds we've already covered include:

Overall, its been one of the worst years ever for hedge funds, as we noted in our November hedge fund performance number update. Thus, the recent moves they've made in their portfolios become all the more interesting given the way the market has played out.

At least, that's what Morgan Stanley thinks. Yesterday (1/14/09), they came out with a pretty big research note on HSBC (HBC), saying they think HBC will need up to $30 billion in equity and will need to halve its dividend. The note comes a day after our post highlighting interesting record options activity in HSBC, where we mentioned HSBC's lack of equity raises amidst the current crisis. Also worth noting per UK regulatory disclosures, hedge fund Eton Park Capital ran by Eric Mindich has had a short position in HSBC for many months. We recently covered Eton Park in our hedge fund portfolio tracking series where we examined their long holdings here.

With 57% of their loans in the US and UK, HSBC is definitely exposed to trouble, despite being a true international bank. Morgan Stanley thinks HSBC has one of the weaker capital ratios in Europe and the second weakest in Asia, and will face problems for the next two years.

An excerpt from Morgan Stanley's report,

"We have reduced our 2009 PBT forecast by 34%, which equates to a 39% drop in EPS and flows through to a 32% fall in 2010. We now forecast 2009 EPS of US55¢ and 2010 of US50¢; 46% and 60% below FactSet consensus, respectively. We have reduced our price target to 455p from 550p previously....In 2007 HSBC paid out $10bn in dividend. Since 1992 investors have on average elected to take 26% of the dividend in scrip. Analysing the history suggests investors become more risk adverse in times of distress, and in our view it would be imprudent for the management team to assume an average take up in 2009 and 2010. If we combine this with our estimate of the capital requirement discussed above, a sharp reduction in attributable profits in 2009 and 2010 as structural and cyclical headwinds take hold (2009: $6.6bn, 2010: $6.2bn), it suggests to us that HSBC will cut its dividend in 2009....Post a $20bn capital increase and a 50% dividend cut, we calculate HSBC would carry a clean Core Equity tier 1 of 7.2% (stripping out the AFS and insurance double counting), which looks reasonable given historical HSBC capital ratios and broadly in line with the recapped Santander, which has 7.1%. [Note Santander is not allowed to add back its €3.8bn AFS reserve, which equates to 80bp of capital]."

While HSBC might have weathered the subprime thunder relatively speaking, it seems as if they are still not out of the storm. As we highlighted in our January 13th post on HSBC, they have the oh-so-fun mix of leverage, large writedowns, and low capital raised. Add record options activity on top of that and things start to get interesting. We also highlighted the $45 level as a "make or break" level for HSBC on technicals. Wednesday at the open it gapped down below it. While a re-test of $45 from the underside is probable, things could get ugly for HBC shares.

The Wall Street Journal is out with a three part series on the "End of Wall Street," which details the collapse of the modern investment banking world. (If you're an email subscriber, you'll have to come to the blog to see the videos).

Part 1 (What Happened)

Part 2 (Why It Happened)

Part 3 (What Happens Next)

Have to give a hat tip to Barry Ritholtz, who is on top of things as always and flagged these videos to everyone's attention.

Wednesday, January 14, 2009

This is the 3rd Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F filings here.

Next up is D.E. Shaw & Co. D.E. was founded in 1988 by David E. Shaw and manages around $33 billion as of December 1st 2008. They focus on intertwining technology and finance and are a hedge fund, private equity firm, and technology development shop all in one. They employ mainly quantitative strategies and do a lot of statistical arbitrage. Shaw oversees strategic maneuvers at the firm, but no longer is active in the day to day operations. He received his Ph.D. from Stanford University. Some notable former employees include Jeff Bezos (before founding Amazon.com) and Lawrence Summers, who recently left the firm to serve on President Elect Obama’s economic team. In our November hedge fund performance numbers update, we noted that Shaw's Oculus fund was up around 10% for 2008 as of November, as they had profited from their global macro strategy. Their Composite fund, on the other hand, was -4% for 2008 at the time, having pursued multiple strategies. You can view a video about the firm's work culture here. In Alpha's latest hedge fund rankings, D.E. Shaw is ranked 6th in the world.

Taken from their website, they invest “in a wide range of companies and financial instruments within both the major industrialized nations and a number of emerging markets. Its activities range from the deployment of investment strategies based on either mathematical models or human expertise to the acquisition of existing companies and the financing or development of new ones.”

The following were their long equity, note, and options holdings as of September 30th, 2008 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Some Increased Positions (A few positions they already owned but added shares to)Freeport McMoran (FCX): Increased position by5,102%Anadarko Petroleum (APC): Increased position by 100%Baker Hughes (BHI): Increased position by 74%Target (TGT): Increased position by 66.5%Goldman Sachs (GS) Calls: Increased position by 47%Warner Chilcott (WCRX): Increased position by 44%Travelers Companies (TRV): Increased position by 40.5%HCP (HCP): Increased position by 42%Allstate (ALL): Increased position by 38%News Corp (NWS-A): Increased position by 29.5%Anheuser Busch (BUD): Increased position by 27%Google (GOOG) Calls: Increased position by 24%Vertex Pharma (VRTX): Increased position by 22.5%Burlington Northern (BNI): Increased position by 22.5%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)United Parcel Service (UPS): Reduced position by 38.5%Hudson City Bancorp (HCBK): Reduced position by 33%Exxon Mobil (XOM): Reduced position by 30%Pfizer (PFE): Reduced position by 25%XTO Energy (XTO): Reduced position by 22%

Assets from the collective long US equity, options, and note holdings were $56.4 billion last quarter and were $45.3 billion this quarter. We have not detailed the changes to every single position in this update, but we have covered all the major moves. Also, keep in mind that these filings only include long equity, notes, and options holdings. They do not reflect their cash, short portions, or holdings in other markets (currency, commodities, debt, foreign markets, private equity, etc). This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. The other funds we've already covered include:

Overall, its been one of the worst years ever for hedge funds, as we noted in our November hedge fund performance number update. Thus, the recent moves they've made in their portfolios become all the more interesting given the way the market has played out.

SAC Capital, the $14 billion hedge fund firm ran by Steven Cohen has been quite busy with SEC filings as of late. We recently covered SAC's portfolio holdings here. Since then, SAC has amended various 13G filings with the SEC, adjusting many of the positions in their portfolio. All of the following 13G filings were made due to SAC's trading activity on December 31st, 2008 or January 1st, 2009. In no particular order:

United Therapeutics (UTHR) - SAC now shows that they have a less than 0.01% stake in UTHR. Back on September 30th, 2008, they had owned 209,562 shares of UTHR. So, they have effectively sold off almost all of their stake.

OM Group (OMG) - SAC now has a 0% stake in OMG and holds 0 shares.

Savient Pharmaceuticals (SVNT) - SAC has sold out of their position of SVNT completely and now owns 0 shares according to their 13G. They previously owned 50,675 shares.

True Religion Apparel (TRLG) - SAC sold completely out of their TRLG position and show 0 shares as of their latest 13G. They previously had held 278,695 shares.

Incyte (INCY) - SAC now has disclosed they have a 0.4% stake in INCY, reducing their holdings drastically from their previous holdings in excess of 2 million shares.

Indevus Pharmaceuticals (IDEV) - They sold completely out of their IDEV.

Keryx Biopharmaceuticals (KERX) - SAC no longer holds KERX.

Emergency Medical Services (EMS) - SAC has disclosed they now only own a 1.2% stake in EMS, drastically reducing their position from last disclosure.

Charlotte Russe (CHIC) - They sold completely out of their position.

Cymer (CYMI) - They also sold completely out of CYMI.

Biomarin Pharmaceutical (BRMN) - SAC sold out of their position entirely.

Chiquita Brands (CQB) - They no longer own this name.

Applied Energetics (AERG) - They also sold completely out of this name.

Century Aluminum (CENX) - Sold completely out of their position.

American Apparel (APP) - SAC no longer owns any APP.

Acorda Therapeutics (ACOR) - Sold completely out of this name.

P.F. Chang's China Bistro (PFCB) - Disclosed they now own a 1.3% stake in the company.

Vaxgen (VXGN) - Now showing a 1.6% stake in VXGN.

Fresh Del Monte Produce (FDP) - Now show a less than 0.1% ownership stake.

Navistar International (NAV) - Disclosed they now have a 2.1% stake in NAV.

Vanda Pharmaceuticals (VNDA) - Sold completely out of their position.

Sanderson Farms (SAFM) - Sold completely out of this name as well.

Assured Guaranty (AGO) - They now have a 0.2% ownership stake in AGO.

Akorn (AKRX) - Now show a 0.3% ownership stake.

Auxilium Pharmaceuticals (AUXL) - Also showing a 0.3% ownership stake in this name as well.

Stewart Enterprises (STEI) - SAC now has a 4% ownership stake in STEI.

Ocean Power Technologies (OPTT) - Due to activity on January 1st, 2009, SAC now shows a 4.9% ownership stake in the company

Hasbro (HAS) - Activity with their shares on December 31st, 2008 leads SAC to disclose a 3.6% ownership stake in HAS.

Cougar Biotechnology (CGRB) - SAC has disclosed they now have a less than 0.1% ownership stake in the company.

Orexigen Therapeutics (OREX) - SAC now shows a 4.9% ownership stake in OREX as a result of their amended 13G filing.

As you can see, from a collective 37 separate 13G filings, SAC was reducing a lot of position sizes for the most part. We just want to again remind everyone that SAC has a tendency to move in and out of positions very quickly, so keep that in mind. We're merely relaying the information that was filed with the SEC and we will update any other positions they may change in the future. SAC decreased equity exposure by almost half from quarter to quarter (based on 13F filings with the SEC) and it was reported SAC was going to cash back in October. Also interesting is that many of the largest positions in their portfolio consist of debt of various companies.

Taken from their website, “SAC is a multi-strategy, private asset management firm founded by Steven A. Cohen in 1992 with 9 employees and $25 million in assets under management. As of July 2008, the firm has grown to over 800 employees with approximately $14 billion in assets under management. SAC's initial investment style was "trading" oriented. However, we have evolved into a multi-strategy, multi-disciplinary, investment management firm emphasizing rigorous research and risk management practices. SAC's investment strategies include, but are not limited to: Fundamental and Technical Long/Short Equity Portfolios, Global Quantitative Strategies, Fixed Income and Credit, Global Macro Strategies, Convertible Bonds, and Emerging Markets.”

Since inception, their funds have returned on average 40% annually, which explains how they can charge a 50% performance fee to investors, compared to the normal 20% that most hedge funds charge. They are very active traders and at any given time can account for up to 3% of the volume on the New York Stock Exchange and up to 1% on the Nasdaq. You can view the rest of their portfolio holdings here (just keep in mind the above recent changes to their portfolio).

Tuesday, January 13, 2009

While we usually leave all the options coverage for some of our other favorite blogs, we simply had to point out this interesting activity in HSBC (HBC). Optionmonster has highlighted the fact that as of yesterday (1/12), HBC "traded 173,000 puts versus average of 7,700 puts over the past 30 days. Crazy busy, and 94 percent trading out in March." Activity was mainly in the March contracts at the 50, 45, and 40 strikes. If it continues to escalate, they said the activity would remind them of that once seen in Lehman Brothers and Bear Stearns. They also noted that it was the largest put activity in that name, ever.

And, today (1/13), the put activity continues, as the March 25's are starting to see volume. As you can see from the chart below, HSBC (HBC) is in a strong downtrend and is trading around $45 currently, a level of recent support. If it breaks this level, then look out below.

(click to enlarge)

We have highlighted HSBC (HBC) as a short on the blog numerous times. Back in August, we noted that delinquencies were rising across the board and the best way to play it would be to short institutions with lots of leverage, derivative exposure, or residential and commercial mortgage exposure. Our post on August 31st, 2008 suggested shorting C.B. Richard Ellis (CBG), General Growth Properties (GGP), Capital One (COF), Discover Financial (DFS), HSBC (HBC), and Washington Mutual (WM). Obviously, shorting all of those names has paid us off handsomely.

GGP and WM both collapsed rather quickly. However, all along, HSBC (HBC) has been meandering along, trading sideways. In our post on September 16th, 2008, we looked at writedowns, losses, and capital raised for various institutions. At that time, we noted that,

"One institution in particular I want to point out is HSBC (HBC): $27.4 billion in writedowns and losses, but only $3.9 billion raised. They by far have one of the more lopsided ratios. Now, we obviously know that this simple chart does not tell the whole story, but I thought it was worth highlighting."

Then, in October, signs of weakness started to appear as the market turmoil continued. Our post on October 8th, 2008 highlighted various Leverage Ratios of financial institutions. In that post, we saw that HSBC's leverage ratio (total assets/equity) was 20.1 as of June 30th 2008, an increase from their ratio of 18.4 in 2007. At the time, we saw that HSBC (HBC) loosely had this deadly mix: use of leverage, large writedowns, and low capital raised.

HSBC has been in a downward spiral ever since. And now we see news of interesting options activity in the name. While we by no means think HSBC is in as bad of shape as a Lehman or Bear, we do think rough waters are in store and that is why we've highlighted them as a short numerous times in the past. Proceed with caution, as the $45 support level is more important now than ever.

Full disclosure: At the time of publication, MarketFolly was short HBC via puts

This is the 3rd Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F filings here.

Next up is SAC Capital, founded by Steven Cohen. Taken from their website, “SAC is a multi-strategy, private asset management firm founded by Steven A. Cohen in 1992 with 9 employees and $25 million in assets under management. As of July 2008, the firm has grown to over 800 employees with approximately $14 billion in assets under management. SAC's initial investment style was "trading" oriented. However, we have evolved into a multi-strategy, multi-disciplinary, investment management firm emphasizing rigorous research and risk management practices. SAC's investment strategies include, but are not limited to: Fundamental and Technical Long/Short Equity Portfolios, Global Quantitative Strategies, Fixed Income and Credit, Global Macro Strategies, Convertible Bonds, and Emerging Markets.” Since inception, their funds have returned on average 40% annually, which explains how they can charge a 50% performance fee to investors, compared to the normal 20% that most hedge funds charge. They are very active traders and at any given time can account for up to 3% of the volume on the New York Stock Exchange and up to 1% on the Nasdaq. And, if you're curious, you can see a picture of Cohen's house here.

Before beginning, we do want to stress that since SAC actively trades positions quite frequently, tracking them via 13F is not necessarily beneficial and we advise that those reading take this with a grain of salt. We are simply covering them since they are a prominent fund and many of our readers wondered what they were up to, out of curiosity.

The following were their long equity, note, and options holdings as of September 30th, 2008 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Some Increased Positions (A few positions they already owned but added shares to)Freeport McMoran (FCX): Increased position by 5,056%JPMorgan Chase (JPM): Increased position by 2,598%Crown Castle (CCI): Increased position by 794%Prudential (PHR) Debt: Increased position by 760%Barr Pharma (BRL): Increased position by 88%Merrill Lynch (MER) Debt: Increased position by 74%Imclone Debt (IMCL): Increased position by 31%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)Newmont Mining (NEM): Reduced position by 34.5%Transocean (RIG) Sedco Debt: Reduced position by 13.3%Chevron (CVX): Reduced position by 11%RedHat (RHT) Debt: Reduced position by 9%

Assets from the collective long US equity, options, and note holdings were $14.3 billion last quarter and were $7.7 billion this quarter. SAC decreased equity exposure by almost half from quarter to quarter and it was reported SAC was going to cash back in October. Also interesting is that many of the largest positions in their portfolio consist of debt of various companies. We also wanted to point out that since this 13F filing, SAC has been actively submitting various 13G filings and we have covered those 37 additional changes to their portfolio.

We have not detailed the changes to every single position in this update, but we have covered all the major moves. Also, keep in mind that these filings only include long equity, notes, and options holdings. They do not reflect their cash, short portions, or holdings in other markets (currency, commodities, debt, foreign markets, private equity, etc). This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. The other funds we've already covered include:

Overall, its been one of the worst years ever for hedge funds, as we noted in our November hedge fund performance number update. Thus, the recent moves they've made in their portfolios become all the more interesting given the way the market has played out.

Pershing Square Capital Management, the hedge fund ran by Bill Ackman, has filed an amended 13D with the SEC and has disclosed a 7.4% ownership stake in General Growth Properties (GGP). The 13D was filed due to their activity on January 9th, 2009 where they added an additional 2.8 million common shares and an additional 3.5 million shares through swaps. Pershing Square now owns 22,901,194 common shares of GGP, and economic exposure to 52,000,000 shares through swaps, for a total aggregate economic exposure to over 74 million shares (24.1% of the outstanding common shares). Reportedly, Pershing has taken the stake in GGP as they wish for them to file for bankruptcy. That might seem silly upon first glance, but take a second to read about Pershing's apparent rationale behind buying GGP. You can also view the rest of Pershing Square's holdings here.

Pershing Square Capital Management is a well known value/activist based hedge fund. The fund started in 2003 after Gotham Partners broke up. The past few years, they have had notable short positions in the bond insurers such as MBIA (MBI) and Ambac (ABK). Some of his activist positions include Target (TGT) and Borders (BGP). Simply put, Ackman is a smart man. We wrote about Mr. Ackman's recent speech at the Value Investing Congress as well as Ackman's lengthy interview with Charlie Rose. Furthermore, you can view one of Pershing Square's investor letters here.

Taken from Google Finance, General Growth Properties is "a self-administered and self-managed real estate investment trust (REIT). GGP, through its subsidiaries and affiliates, operates, develops, acquires and manages retail and other rental properties, primarily shopping centers, which are located primarily throughout the United States."

"PBS is hosting a 2 hour documentary on January 13th on the financial crisis hosted by Niall Ferguson titled the Ascent of Money (same as his book). The program is going to feature commentary from from financier George Soros and Federal Reserve Chairman Paul Volker -- should be very interesting."

Monday, January 12, 2009

There has been a lot of news popping up in Hedge fund land lately, so we thought we'd give a brief summary of some of the news:

Firstly, Jim Simons' Renaissance Technologies (or Rentec as they are known) has disclosed that they will be waiving their 1% management fee for their Institutional Futures Fund for 2009. The fund is a year old and lost 12% for the year in 2008. We recently covered Rentec in our hedge fund portfolio tracking series here.

Secondly, Bill Ackman's Pershing Square has been betting that General Growth Properties (GGP) will file for bankruptcy. But, they haven't been shorting them. Pershing owns a large stake in the U.S. mall owner and operator. And, even though Pershing owns such a large chunk of shares, they would like to see GGP file for bankruptcy. Why? Well, the answer lies hidden in GGP's inability to refinance their maturing debt, due to the troubled credit markets. GGP's problems don't stem from their real estate assets. They have around $30 billion in assets and $27 billion in debt. Companies who go through bankruptcy with more assets than liabilities usually leave shareholders in good shape. At least, that's Pershing's rationale. Also, we've recently covered Pershing Square's portfolio in our hedge fund tracking series.

Thirdly, JD Capital Management has closed its $1 billion Tempo Master Fund. The fund suffered big losses and was down more than 40% for 2008. The fund is ran by J. David Rogers who was previously co-chief of equity derivatives at Goldman Sachs. They will still run their volatility arbitrage fund, with $100 million AUM.

Lastly, Barron's was out with a piece claiming that hedge funds had met their match. They noted that they thought the industry could be halved, and we think that's a very realistic number as well. Only the strong survive. They went on to focus on specific hedge fund strategies, noting,

"For long/short funds, those industry staples that not only buy stocks but also bet on declines, the big problem last year was on the long side; the huge majority of stocks went down. In the 2000-2002 bear market, by contrast, there was much greater dispersion among stocks. Hedge funds as a group almost broke even back then, while the broad market was off 22%.

Long/short was by no means the only hedge-fund strategy to fail last year. Convertible arbitrage, which entails buying convertible securities and short-selling the related stocks, racked up losses of nearly 50%, according to Dow Jones indexes. And investing in distressed securities produced average losses of 37%."

Since we track hedge fund portfolios and their performance, we have also noted the poor performance this year. And, this even includes some of the most respected funds in the game. We noted their poor performance in both our October and November performance updates and will soon be out with our December update. You can read the entire Barron's piece here.

This is the 3rd Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F filings here.

Next up is Citadel Investment Group. Citadel was founded in 1990 by Ken Griffin and is a market maker as well as a hedge fund, employing investment strategies through multiple asset classes. They are responsible for nearly 30% of US equity options volume, and 8% of NYSE and Nasdaq volume. Griffin has recently noted that the market madness has provided some of the greatest opportunities he’s seen in a long time. Citadel was -13% in November and was -47% for the year at that time. Their flagship $10 billion combined Kensington and Wellington funds had been the hardest hit, due to losses from convertible bonds, and bank loans, among others. Citadel recently announced they'd be opening a new fund.

The following were their long equity, note, and options holdings as of September 30th, 2008 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Some Increased Positions (A few positions they already owned but added shares to)CMS Energy (CMS) : Increased position by 58,909%Capital One (COF) Calls: Increased position by 2,391%Caterpillar (CAT) Calls: Increased position by 2,174%Cisco Systems (CSCO) Calls: Increased position by 1,834%Caterpillar (CAT) 2nd set of Calls: Increased position by 1,495%CME Group (CME) Calls: Increased position by 880%Cisco Systems (CSCO) : Increased position by 605%Cisco Systems (CSCO) : Increased position by 488%CME Group (CME) Puts: Increased position by 345%Cisco Systems (CSCO) 2nd batch of Puts: Increased position by 337%Apache (APAHP) Calls: Increased position by 328%Bank of America Preferred (IKJ) Calls: Increased position by 323%Conoco Philips (COP) Puts: Increased position by 221%Apple (AAPL) Calls: Increased position by 127%Chesapeake Energy Preferred (CHKDO) : Increased position by 108.5%Amazon (AMZN) Calls: Increased position by 101%Apple (AAPL) : Increased position by 88%Apple (AAPL) Puts: Increased position by 73%Bank of America Preferred (IKJ) Puts: Increased position by 55%Conoco Philips (COP) Calls: Increased position by 50%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)n/a

Assets from the collective long US equity, options, and note holdings were $10.4 billion last quarter and were $38 billion this quarter. Ever since this filing though, Citadel has had some tough times, seeing their flagship funds drop 47% for the year as of November. Please note that we have not detailed changes to every single position in this update, but we have covered all the major moves. Also, keep in mind that these filings only include long equity, notes, and options holdings. They do not reflect their cash, short portions, or holdings in other markets (currency, commodities, debt, foreign markets, private equity, etc). This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. The other funds we've already covered include:

Overall, its been one of the worst years ever for hedge funds, as we noted in our November hedge fund performance number update. Thus, the recent moves they've made in their portfolios become all the more interesting given the way the market has played out.

We've mentioned many times before that the consumer has a rough 2009 ahead of them and that discretionary retailers could be in the house of pain. The following data simply backs up this thesis. We recently looked at consumer spending during recessions, and you might be slightly surprised at the findings. Courtesy of the NY Times, we see that retail sales in December were weak, especially at discretionary retailers.

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You'll also take note that Walmart (WMT) continues to be one of the lone bright spots in a dark consumer world. All along, we have advocated getting short discretionary retailers and going long the likes of Walmart (WMT) and McDonald's (MCD) as a hedge. The thesis here has always been that the consumer will trade down to cheaper alternatives and thus those companies will not suffer as much as normal, non discount retailers. And, after all, its merely a hedge to our overall bearish consumer bias.

Then, courtesy of the Big Picture, we see that consumer deleveraging has actually just really begun. As this trend continues, look for things to possibly get even worse in the retail world.

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As a result of the deleveraging, we've said that the consumer savings rate will have to rise. And, lastly, as the consumer struggles along, they'll turn to their credit cards to get by once they run out of cash. Thus, the credit card squeeze begins and companies with a lot of credit card/consumer debt exposure, like Capital One (COF), will continue to see a rise in delinquencies and charge-offs.

Paulson & Co, the $10 billion hedge fund famous for making a fortune by betting against sub-prime when this whole mess began to unfold has lost one of their Co-Portfolio Managers.

Paolo Pellegrini, who was responsible for Paulson's credit opportunities fund has resigned from Paulson. He will start his own fund this year, starting initially with his own money, and then opening up to outside investors. PSQR LLC will be his new fund's name and Pellegrini said he'll be dabbling in commodities and interest rates, using arbitrage to benefit. He left Paulson amicably and said he simply desired to run his own firm (like oh so many others out there).

Paulson's Advantage Plus fund has returned 19.44% year-to-date as of the end of August. Additionally, their Credit Opportunities I & II funds were up about 15% for the year as of the middle of December.

Pershing Square Capital Management, the hedge fund ran by Bill Ackman, has filed an amended 13G with the SEC and has disclosed a 0% ownership stake in Barnes & Noble (BKS). The 13G was filed due to their activity on December 22nd, 2008 and they completely sold out of their position in BKS. This is a pretty substantial change to their portfolio, considering that as of last 13F filing (which shows positions as of September 30th, 2008), 4.4% of their portfolio was allocated to BKS. Now, they hold 0 shares. You can also view the rest of Pershing Square's holdings here.

Pershing Square Capital Management is a well known value/activist based hedge fund. The fund started in 2003 after Gotham Partners broke up. The past few years, they have had notable short positions in the bond insurers such as MBIA (MBI) and Ambac (ABK). Some of his activist positions include Target (TGT) and Borders (BGP). Simply put, Ackman is a smart man. We wrote about Mr. Ackman's recent speech at the Value Investing Congress as well as Ackman's lengthy interview with Charlie Rose. Furthermore, you can view one of Pershing Square's investor letters here.

Taken from Google Finance, Barnes & Noble is "primarily engaged in the sale of books. The Company's principal business is the sale of trade books (generally hardcover and paperback consumer titles, excluding educational textbooks and specialized religious titles), mass-market paperbacks (such as mystery, romance, science fiction and other fiction), children's books, bargain books, magazines, gift, music and movies direct to customers."

In a Form 4 filed with the SEC on Friday night (1/9), Harbinger Capital Partners disclosed that they sold shares of Cliffs Natural Resources (CLF) on January 7th and January 8th, 2009. In total, Harbinger sold 1,867,121 shares through 10 different sets of orders. After all was said and done, Harbinger now owns 7,254,789 shares, down from their previous 9,121,910.

In addition to the SEC Form 4 filing, this press release was issued:

"NEW YORK--(BUSINESS WIRE)--As part of ongoing portfolio management and rebalancing, the Harbinger Capital Partners® funds announced a reduction in their exposure to Cliffs Natural Resources (NYSE: CLF) in order to bring the position in line with current portfolio metrics and may continue to do so in the future, as conditions permit. Harbinger maintains its conviction that Cliffs controls unique and valuable assets and believes Cliffs will be one of the prime beneficiaries of the eventual economic recovery.

Though it has adjusted its stake in Cliffs, Harbinger maintains its commitment to supporting value-maximizing strategies at Cliffs and, as such, reserves the right to be in contact with members of management, members of the Board, shareholders and other relevant parties regarding alternatives that Cliffs could employ to maximize shareholder value. Harbinger also reserves the right to repurchase shares in the future if it deems it appropriate for its investors should the portfolio metrics permit."

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